3 factors that could soon derail the bull market

Investors have been riding this wave to fresh records, but history has shown us that the party could be ending.

By StreetAuthority Jun 5, 2013 10:51AM
Bull figurine on ascending line graph and list of share prices (© Adam Gault/OJO Images/Getty Images)By David Goodboy

These are truly days of wine and roses for stock market investors.

After being knocked down in the dot-com bubble of the late 1990s and again during the financial crisis of 2008, long-term investors are being rewarded for their persistence and dedication as stocks surge higher, breaking record after record.

In fact, this bull market turned four years old in March and is showing no signs of letting up.

Historically, the average bull market has lasted 4.5 years. In and of itself, this means little; for instance, the 1990s bull market lasted nearly seven years without a major correction.

But according to my research, there are three distinct signs that make me think this bull market may be ending soon. Here's what you need to know.

1. Irrational exuberance
This term is best known for its use by former Federal Reserve Chairman Alan Greenspan during the dot-com bubble of the late '90s.

This means that investor excitement has driven stock prices higher than justified by fundamental support. While this was certainly true during the dot-com boom, it isn't as true today.

Companies are posting strong numbers, and the economy is thriving. However, it is important to note that the primary cause of the today's bull market is unfettered Federal Reserve easing measures. Questions like "How much is too much?" and "How long can the Fed keep pumping out money to support the economy?" make me think that the Fed itself may be acting with irrationally exuberance -- and a sharp pullback could occur.

Remember, pullbacks of 10% are common in bull markets. That means 1,500-plus points in the Dow Jones Industrial Average ($INDU). Be ready. 

In addition, it takes a full 25% drop from the highs to signal a bear market has started. This equates to a 3,750-point drop in the Dow. Even if this happens, it leaves the Dow well above the psychologically critical 10,000 level.

2. Global uncertainty
We live in a connected world. The debt crisis in Europe is far from over, further austerity measures could affect the U.S. economy, and a slowing growth rate in China may eventually hurt U.S. exports.

3. Fed changes
While the Federal Reserve is the prime driver behind the bull market, it could easily shut off the faucet.

If the Fed increases interest rates or throttles back on the quantitative easing measures, stocks could plunge in response. While interest rate increases are not expected until the unemployment rate drops to 6.5%, the Fed may turn to other measurements to make its decision. All the Fed needs to think is that the economy is overheated and it will step in to increase rates.

Federal Reserve Chairman Ben Bernanke is stepping down in 2014. His replacement may have a different market view and pull back the reins on the easing measures. If this occurs in an unexpected way, be prepared for the largest stock single market plunge of the century.



Along with the three expected ways the bull market could be derailed, economic black swans could also end the good times.

A "black swan" event is one that is completely unexpected and has profound effects. (The 9/11 terrorist attacks are an example of such an event that had major effects on the economy.)



Risks to consider: Remember, diversification is the key to success in the stock market. A well-diversified portfolio can weather most market storms and create solid profits during the good times.

Action to take: While the market appears technically to be topping out, anything can happen, and it's possible it could continue much higher. However, investors need to be mindful of these signals, which could portend a derailment of the bull market. Remember, declines of 10% or more are common bull market occurrences.

More from StreetAuthority
79Comments
Jun 5, 2013 11:41AM
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A recovery that is fueled by printing $85 billion each month is not a recovery at all.  It is a fool's paradise.
Jun 5, 2013 11:41AM
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The economy is thriving??????  O.M.Gosh! Where?

Jun 5, 2013 11:36AM
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You forgot a few more...


4.  Government SPENDING
5.  Government BORROWING
6.  All of Owebama's massive TAX increases
7.  Obamacare  (mortician's support act?)


Jun 5, 2013 12:17PM
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Economy is thriving? Go get a real job pal. "Bend over Ben" is keeping this phony stock market up. That's all there is to this ruse/scam/disgrace. 
Jun 5, 2013 11:59AM
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You forgot the biggest factor! Obama.
Jun 5, 2013 1:05PM
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Here are the two things.
The Fed is threatening to pull the $85 billion per month.
Obamacare is stopping people from hiring. Get a summary of Obamacare and see all of the requirements and new taxes. It is not just what you hear from the news. It is a huge burden.

Also, the only way that the US government is collecting money from individuals for their premiums is through withholding money from their tax refunds. That one will be easy to figure out. Reduce withholding and not pay. This is going to be a financial disaster for the government.

Jun 5, 2013 12:40PM
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Already derailed.

The economy is weak, the market goes down.
The economy is picking up, the fed will wind down, the market goes down.

GET THE PICTURE!!!!!!!!!!!!!!!!

Jun 5, 2013 1:24PM
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There are 3 million less employed than the start of the recession/depression. If the funny money is taken out, it falls. Do not worry. There will be plenty of under 30 hour per week jobs out there in the near future. That is why Obama wants to raise the minimum wage. To help offset so many people only working 30 hours. They just keep playing with the numbers.
Jun 5, 2013 12:09PM
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Rumors, by pundits, is another factor that will derail the market.

Jun 5, 2013 2:44PM
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Let's just hope we can hold out until 2014 and get control of both Congress and the Senate.  It is America's only hope.

There is no saving us from Odumbo stupidity.  A complete failure both as a person and the other job he has now.

Jun 5, 2013 1:10PM
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"In fact, this bull market turned four years old in March and is showing no signs of letting up"  ??   Closes:  5/29 = (-$106.59), 5/31 = (-$208.96), 6/4 = (-$76.49), today=  ( - $188.59) at 1PM.  "... no signs of letting up."??    What would be a "sign of letting up"?


Jun 5, 2013 1:33PM
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Whether or not the economy is doing good or not depends on your own personal situation, I have friends who are doing great and are like "what Recession". I know many others who are just struggling. One of the main differences is that most of the successful people have moved away from this area because the economy is depressed here and found greener pastures elsewhere. I have a friend of mine who was doing Union work, but was  always laid-off, he moved down South is making 28$ an hour at a non-union work site which is like half of what he was making, but he is happy because its a lot more than unemployment paid.

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There is one most important factor that the author of this story left out. The Democrat Party and their leader Barack Hussien Nixon are still in place in DC, continuing to ruin this nation from within and purposely killing our economy and health care system. Once the free money dies up, so too will the stock market run, but the average American will be left holding the bag long after Richard M. Obama has left the Oval Orifice. Too bad.
Jun 5, 2013 1:27PM
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It's not Bens job to fix our Nation, only congress can pass laws that would do that. Bond Buyer Ben is simply reacting to a lack of action by Washington to repair the financial damage done by the great crash of 2008. Historically Washington has spent it's way out of recessions and depressions, but with debt to GDP around 100% we no longer have that luxury. Had congress passed the American jobs act or a similar bill, un-employment would most likely be below 6.5% today and the bond buying would be coming to an end and the recovery would be much more robust. Everybody wants to whine about Ben, but nobody here has offered a better plan than Ben's. To allow the housing market and un-employment to remain stagnate would simply be ill responsible of Ben and we would soon find ourselves in a depressionary cycle of deflation. Please stop whining or offer up a better plan, I would like to hear it.
Jun 5, 2013 12:53PM
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This is an easy one!!!!

1. Traders
2. Brokers
3. Press

Need I say more!!!!!!!!!!!!!

Jun 5, 2013 1:31PM
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....It appears we are in the midst of a potential 10% correction..........

 

Everyone will have an opinion on this, however, the lucky guesser will be correct. Nobody knows for sure the future of the market, but it certainly seems to have topped out - at least short term. Good time to short stocks and then buy long once it bottoms out at $13.5k....then back to the races.

Jun 5, 2013 3:10PM
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"A recovery that is fueled by printing $85 billion each month is not a recovery at all. It is a fool's paradise."

 

 

While Washington just stands idle with their collective thumbs jammed up their collective asses....that is what is appalling.

Jun 5, 2013 1:34PM
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The market will not completely tank as long as (The drug dealer) Ben keeps the printing press running overtime, but just like an addict threaten the markets drug/money supply and the market is going to get extremely shaky and twitchy (wild ups & downs). Ben and the world banks have painted themselves into a corner. Do a slow withdraw or go cold turkey both options may kill the addict, (market / economy).    
Jun 5, 2013 4:37PM
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Afew bad days and everybody is afraid of their shadow.This is the time to buy.I think

the reason so many people don`t like Bernanke is because of his beard.

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